Dovish Draghi drives euro devaluation

With Draghi having talked down the euro, it is now time for the markets to turn to Trump says Joshua Mahony, market analyst at IG.

Dovish Draghi drives euro devaluation

After a month of persistent gains for the FTSE, we are starting to get used to seeing the index trading in the red, with Theresa May’s Tuesday speech providing a rebound for the pound.

If Tuesday’s speech was aimed at EU leaders, her appearance at Davos was aimed squarely at the business community, championing the idea that the UK is ‘open for business’. After months of worry, there is a feeling the people are finally starting to look past the short term fears and instead focusing on the benefits that could eventually emerge from a Brexit.

Mario Draghi managed to carry on his longstanding tradition of talking down the euro, with the governor declaring that he sees the current rise in inflation as temporary.

The rise in oil prices has certainly provided a sharp inflation spike over the past six-months. However, as oil prices slow so too will inflation and that gives Draghi the ability to continue to tout the dovish stance he has been wedded to for years.

It is unlikely that the ECB will increase or lengthen their QE programme anytime soon, yet Draghi knows that to simply mention this will provide eurozone exporters a boost from further euro weakness.

First came May, then came Draghi, and next it is the turn of Trump, with the focus shifting towards the US. Amid the constant currency wars raging since the 2007 crisis, it has been the US which stands willing to move away from the habitual devaluation to start raising rates instead. Yet in Trump they have a highly unpredictable character, who seemingly cast his eye unapprovingly at the value of the dollar.

Whether Trump is willing and able to follow words with actions will be something which could shape the FX market for years to come.

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